Michelin to invest Rs 7,000 cr in India

[B. Karthick]

Michelin to invest Rs 7,000 cr in India

NEW DELHI: In what would be one of the largest FDI inflows into the
country, Michelin & Cie, the world’s second-largest tyre maker, is
looking
to invest up to Rs 7,000 crore ($1.48 billion) in India over a 10-year
period to make and market radial tyres and tubes in the country.

Incidentally, this development follows the French tyre manufacturer’s
announcement to cut 2,900 jobs in France as part of a business
reorganisation to focus on higher-margin tyres.

For Michelin, this project comes after a joint venture with Delhi-
based Apollo Tyres failed to take off. Apollo Tyres has already given
a no- objection certificate (NOC) to Michelin to start its own
operations in the country even as the French tyre major continues to
own around 8% in it.

A person directly involved in the transaction said the French tyre
giant has sought government approval to acquire 100% stake in a new
company Michelin India Tamil Nadu Tyres formed in April 2009. This
company will set up the proposed greenfield unit, which would absorb
investment worth Rs 4,000 crore in the first phase running into 2016.

“The company may ramp up investments by another Rs 3,000 crore after
the first phase,” said the person who did not wish to be identified.
Michelin has been negotiating with the Tamil Nadu government for
procuring land for the project. It wants to set up a plant on 290
acres in an industrial park developed by State Industries Promotion
Corporation of Tamil Nadu.

The first phase of the proposed project in Tamil Nadu will provide
jobs to around 1,500 people, which may go up to 2,000 after further
investment of Rs 3,000 crore is made. Over time, half of the tyres and
tubes produced at the plant will be exported.

The slack demand of tyres has impacted all major markets across the
globe, especially in the US and Europe where sales have fallen by a
third in the past few months.

Tyre sales in India, however, had kept the industry buoyant riding on
the back of rising passenger car and two-wheeler sales. Strong demand
from the replacement market after a high single-digit growth in FY09
for the 10 crore vehicles plying in India has also helped the tyre
market.

In the past, many multinationals companies have announced multi-
billion dollar projects for India, but many of them have delayed
investment either because of the slowdown or because of regulatory
constraints on foreign direct investment (FDI) in the country.

Most recently, Swedish furnishings retailer Ikea decided to postpone
its foray into India in the wake of continuing restrictions on FDI in
retail sector. There are no such restrictions on FDI in the tyre
sector.

Earlier, in 2004, Michelin had picked 14.9% of Onkar Kanwar-led Apollo
Tyres for Rs 130 crore through a preferential allotment. The strategic
acquisition was just short of the 15% mark which triggers a mandatory
open offer to acquire further 20% of a listed company.

Michelin also entered into an agreement to provide technical
assistance to Apollo Tyres for passenger car radials.

It had also announced a separate 51:49 joint venture with Apollo Tyres
to manufacture, market, sell and distribute bus and truck radial tyres
in a greenfield plant besides importing passenger car radial tyres.

Michelin had also entered into a technology licensing agreement along
with development work and technical assistance agreement for bus and
truck radial tyres proposed to be manufactured by the JV company.

This venture, in which Michelin was to be the majority stakeholder,
was to absorb investments of Rs 322 crore over a period of four years
producing truck and bus radials for both Apollo and Michelin brands
without any co-branding arrangements. This was struck soon after
Apollo Tyres withdrew a proposed technical alliance with Germany’s
Continental.

The proposed JV which was to commence production in 2005, was a non-
starter and in September 2005 Michelin terminated the agreement and
bought out Apollo’s stake in the venture.

At the same time, the other technology licensing and technical
assistance agreements were also terminated. At the same time Apollo
Tyres furnished an NOC for Michelin to start its own operations or
through a separate JV with any other partner in India.

But, Michelin continued to own a minority stake in the public-listed
Apollo Tyres. Michelin’s original stakeholding in Apollo Tyres
whittled down from 14.9% to 11% as a result of further fund raising
done by the Indian company. In the past one year, Michelin has sold
shares of Apollo Tyres in the open market.

Most recently, it sold 3.3% in Apollo Tyres for around Rs 50 crore
through open market sales and now holds around 8% in the company.
Michelin also has a 13-year old wholly-owned entity called Michelin
India, a dormant company.

The Indian tyre industry is dominated by local players like MRF,
Apollo Tyres, Ceat, JK Tyres and Birla Tyres. The US-based Goodyear
also operates a mid-sized tyre firm through an Indian public-listed
company.

Rising demand for automobiles has led other major global tyre
companies like Yokohama Tyres, Bridgestone and Continental Tires to
enter India in the past few years catering to the high-end passenger
car tyre market. But Michelin’s proposed venture will be the biggest
ever foreign investment in the tyre sector.

Michelin currently has 64 manufacturing units in 19 countries
globally. Although most of the units are located in Europe and the US,
it also has plants in Mexico, Brazil, Russia, Romania and Poland. In
Asia, it has facilities in Thailand, China and Japan.